The 4 Percent Rule

*The 4 Percent Solution*
**By Lew Sichelman**

LewS***“Toss people a lifeline,” the Senator from Oregon said the other day in a talk about the millions of folks who are still trapped in mortgages with high interest rates, “and good things will happen.” Toward that end, Jeff Merkley, the son of a millright and the first in his family to attend college, would create what he calls the Rebuilding American Homeownership Trust to purchase underwater mortgages.

****The trust would be housed within any of several agencies – the Federal Housing Administration, perhaps, or the Federal Reserve Board, or maybe the Federal Home Loan Bank System. But it wouldn’t be permanent. Rather, the trust would stop buying loans after three years and eventually go out of business as the loans in its portfolio are either sold to investors or paid off by borrowers.

****As the Oregon Democrat spelled it out, owners who owe more on their homes than their places are worth would sell their loans to the trust. And in turn, they would get another loan from the trust, one that better meets their financial circumstances.

****The three choices: A 15-year, 4 percent mortgage, which would rebuild equity at a faster clip; a 30-year, 5 percent loan with lower monthly payments than the first option, and a two-part financing package that includes a first mortgage at 95 percent of the home’s current value and a soft second that would not have to be repaid for five years. As long as borrowers are up-to-date on their current mortgages and meet basic underwriting standards, the choice would be theirs.

****The Trust would pay for itself from an approximate 2 percent spread between the cost of its funds and the interest rates it charges. The proceeds, plus insurance and risk transfer fees, would cover the cost of administration and defaults – and possibly even generate a profit for the federal coffers.

****Merkley says his proposal to restore home ownership – he calls it the “4 Percent Refinancing Option” – would strengthen communities where foreclosures are rampant by stabilizing house prices, and it would improve the construction sector and all sectors tied to the housing market. But most of all, the greater spending power given back to underwater borrowers would help improve the overall economy.

****“No program is without risk,” says Merkley, a member of the all important Senate Banking Committee, “but there is also great risk on the current course, with millions of families trapped in high-interest loans, barely making ends meet, and generating high levels of defaults with adverse impacts for families, communities and the economy.”

****The Senator is so convinced that his plan would work that he has produced a detailed booklet about it, and suggests that one or more states could lead the way by testing it out immediately with unused money from the federal Hardest Hit Fund. Another strategy might be for a state or two to use funds from the national mortgage settlement negotiated by the state attorneys general.

****Whatever way our political leaders choose to fund the program, Merkley says his proposal “has a high probability of not only breaking even, but of generating a profit” for U.S. taxpayers.

****The Oregon Democrat points out that the government stepped in during the financial meltdown, and it helped restore the domestic auto industry. Now, he says, its time to help struggling families whose assets are tied up in houses that have plummeted in value.

****Merkley realizes his plan is a bold one, but he cites President Franklin Roosevelt, who said in 1932: “The country demands bold, persistent experimentation.”

****While some might say the risk of launching a program such as the one this lawmaker proposes is too great, he counters that there also is great risk in doing nothing. “That, too, is a choice,” Merkley says. “A choice that would judge acceptable the current high rate of foreclosures, the stagnation in home prices, the collapse of the construction industry, and the damage all this is doing to out families and our communities.”